Steinberg v. City of Corpus Christi

The opinion of the court was delivered by: Matthew F. Kennelly, District Judge

MEMORANDUM OPINION AND ORDER

In these consolidated appeals, Chiplease, Inc., Illinois Investment Trust No. 92-7163, and the Chapter 7 Trustee of Resource Technology Corporation appeal the bankruptcy court's order denying a motion by the Trustee seeking to assume and assign to Chiplease and the Trust a contract between RTC and the City of Corpus Christi, Texas. The real parties in interest in the appeals are Chiplease and the Trust, to which the Court will refer as "appellants." For the reasons stated below, the Court affirms the ruling of the bankruptcy court.

Facts

Before it was put into involuntary bankruptcy, RTC was in the business of extracting methane gas from landfills and disposing of it or converting it into usable energy, which RTC then sold. On November 26, 1996, RTC entered into a contract with the City of Corpus Christi, which operates the J.C. Elliot Landfill in Corpus Christi, Texas. Under the agreement, RTC was to construct and operate a gas collection and conversion system at the landfill. The agreement had a term of ten years, to expire on November 26, 2006. See Agreement § 6(a), Appellee Ex. B. The agreement required RTC to obtain all permits necessary to install, operate, maintain, repair, and replace the collection and conversion systems. Additionally, the agreement contained a de facto termination clause, which provided:

The Contractor [RTC] will pursue field testing, licenses, permits, and sales contracts in an expeditious manner and at its own expense. Any lapse of 90 days in operation of the Collection System or Conversion System constitutes a de facto abandonment and a Termination Event. The Contractor [RTC], at its option, may also abandon this Agreement by providing a certified letter to that effect to the City Manager. Such abandonment constitutes a Termination Event.

See id. § 8.

In 1999, RTC was put into involuntary Chapter 7 bankruptcy and later converted its case to a Chapter 11 reorganization. On October 23, 2001, RTC and Corpus Christi entered into an agreed order to cooperate, in an attempt to salvage their 1996 agreement. In the agreed order, the parties agreed to use their best efforts to receive permit approval from the Texas Natural Resource Conservation Commission (TNRCC). For the landfill project to proceed, TNRCC had to issue certain permits for construction of a gas recovery and conversion system at the landfill.

The record reflects that in November 2001, RTC had presented to Corpus Christi a Class 1 permit modification application that required the City's signature before it could be submitted to the TNRCC. On January 11, 2002, Corpus Christi sent RTC a letter in which it raised questions concerning RTC's permit application and asked RTC to add certain information. RTC contends that Corpus Christi's comments regarding the permit application related to construction issues rather than permitting issues and that the issues the City raised in the letter were mere pretexts to avoid signing the permit modification application. RTC, however, did not respond to Corpus Christi's January 2002 letter, address the City's concerns, or raise any disagreement with the City's requested additions to the permit modification application.

After receiving no response to its January 2002 letter, Corpus Christi sent a letter to RTC on July 3, 2003, explaining that due to RTC's defaults under the agreed order, Corpus Christi considered the agreement terminated. On August 4, 2003, RTC responded to Corpus Christi's July 2003 termination letter, disputing several of the points raised in the letter. The City did not respond to RTC's August 2003 letter.

Chiplease and Trust No. 92-7163 hold secured pre-petition and Chapter 11 claims against RTC. As a result of these interests, they obtained rights to purchase certain RTC assets.

On May 26, 2006, Chiplease filed a motion asking the bankruptcy court to compel the Chapter 7 Trustee to file a motion to assume the November 26, 1996 agreement between RTC and Corpus Christi and assign the agreement to Chiplease or its designee, Illinois Investment Trust No. 92-7163. On June 29, 2006, the Bankruptcy Court entered an order granting the motion to compel.

On July 7, 2006, the Trustee filed the motion to assume and assign. Corpus Christi objected to the motion and argued that before ruling, the bankruptcy court needed to decide whether the agreement had already terminated due to RTC's alleged default. More specifically, the City argued that the agreement had already terminated due to RTC's defaults and that in any event, the agreement was set to expire a few months hence, on November 26, 2006. Corpus Christi contended that the only way to renew the contract was if the parties consented, which the City said it would not do.

On October 30, 2006, the bankruptcy court held an evidentiary hearing on these preliminary issues. Following the hearing, the court denied the motion to assume and assign. The court concluded that the agreement between RTC and Corpus Christi had terminated on July 3, 2003, when, after receiving no response to its January 2002 letter, Corpus Christi sent its termination letter to RTC. The bankruptcy court noted that RTC had not responded to Corpus Christi's January 11, 2002 letter for over eighteen months. The court found that this delay amounted to a "failure to comply with the requirement imposed by the agreed order to 'cooperate and use its best efforts' to present the permit modification application to the Texas regulatory agency." See Oct. 30, 2006 Tr. 239-40. The bankruptcy court further ruled that Corpus Christi's termination of the agreement was further justified because RTC had terminated its contractor, Weaver Boos & Gordon (WBG), for the landfill project, which the court held constituted a breach by RTC of a provision of the agreed order. Because the agreement had been terminated, the court denied the Trustee's motion to assume and assign the agreement to appellants.

Appellants contend the bankruptcy court erred when it held that RTC's agreement with Corpus Christi had terminated. They first argue that the bankruptcy court ruled on an issue not before it in finding that the Corpus Christi agreement had terminated in July 2003. Appellants next contend that the City's actions after the July 2003 letter essentially waived any claim that the July 2003 letter terminated its agreement with RTC. Third, appellants contend that the bankruptcy court erred when it held that RTC terminated WBG and concluded that terminating WBG constituted another breach of the agreement by RTC. Fourth, appellants argue that the bankruptcy court erred by failing to find that the City acted unreasonably when it refused to sign the permit modification application. Finally, appellants contend that the bankruptcy court erred by failing to find that Corpus Christi improperly repudiated the agreement or obstructed RTC's performance under the agreement, such that the term of the agreement should be extended.

The issue before the bankruptcy court was whether the RTC--Corpus Christi agreement, as modified by the contracting parties' agreed order, terminated prior to the Trustee's motion to assume and assign the agreement to appellants. The bankruptcy judge concluded that the agreement had been properly terminated due to RTC's breach and therefore held that the agreement could no longer be assigned. Specifically, the bankruptcy judge held that RTC breached its obligation to use its best efforts to present the Class 1 permit modification to the TNRCC when it failed to respond to Corpus Christi's January 11, 2002 letter for over eighteen months. The court explained that it believed the intent of the agreed order could not be complied with by an 18-month silence in response to the position taken by the City of Corpus Christi. To comply with the provisions of the agreed order would have required RTC at a minimum to give an answer to each of the points raised by the January 11, 2002, letter stating its belief, if it had a belief, that the city was incorrect in its assertions. Had there been such a response, it may have been appropriate for the city to have withdrawn its concerns, perhaps the parties could have reached accommodation. Simple silence in response to that letter was an absence of best efforts to obtain the permit that was required to allow the construction to take place.

See Oct. 20, 2006 Tr. 240. The court concluded that Corpus Christi was justified in sending its July 2003 letter highlighting RTC's defaults and failure to comply with the requirements of the agreed order, and it held that the letter terminated the parties' agreement. The court concluded that at the time of the Trustee's motion to assume and assign, there was no existing agreement to assign to appellants.

Appellants argue that the bankruptcy judge, in deciding that the July 2003 letter terminated the agreement, ruled on an issue that was not before him. They argue that it was unclear at the bankruptcy hearing that the court would consider evidence prior to October 2002, which would have precluded consideration of Corpus Christi's January 2002 letter to RTC. Appellants also contend that under Texas law, the agreement's "best efforts" clause is unenforceable.

Corpus Christi responds that the issue being considered at the hearing in the bankruptcy court was whether the agreement had terminated. It argues that the bankruptcy judge's determination that Corpus Christi's July 2003 letter terminated the agreement was, in fact, pertinent to the key issue to be determined. The Court agrees. The bankruptcy court relied on evidence presented at the evidentiary hearing to conclude that the agreement was no longer in existence. The Court cannot say that the bankruptcy judge decided an issue that was not before him.

Appellants contend that it was unclear at the bankruptcy trial what the court was considering. Specifically, they argue that based on the bankruptcy judge's statements at trial, it appeared he would not consider evidence prior to October 2002, which would have precluded consideration of Corpus Christi's January 2002 letter to RTC. See Oct. 30, 2006 Tr. 35-36. Upon reviewing the portions of the transcript that appellants rely on, the Court disagrees with appellants' characterization of the bankruptcy judge's ruling. Appellants highlight a portion of the transcript where the bankruptcy judge stated "there is no need for me to consider what might have happened before 2002." Id. at 36. During this colloquy, the bankruptcy judge addressed whether appellants could submit evidence to the court regarding the construction issues which it alleged were pretexts for Corpus Christi's refusal to sign the permit modification application. Id. The court held that the evidence regarding any construction concerns with the two wells at the landfill was not relevant. The court stated:

No, it's not true that any misstatements regarding the question of the two wells that were dealt with here would be relevant to what happened thereafter. If you can show that the claims that they're now relying on are not true, that there wasn't any real problem with RTC post-October 2002, you will win. If you can't show that, you'll lose. What happened previously isn't going to really bear on that. It's not a question of intent. It's a question of the actuality of the asserted problems. . . . What I am saying is that Corpus Christi, based on the statement that I just heard, contends that October 2002 was the beginning of RTC's nonperformance that they're contending gave rise to termination of the contract . . . . So there is no need for me to consider what might have happened before 2002. The question of their mental state, the mental state of the people in Corpus Christi really is not relevant. What's relevant is whether RTC failed to perform from 2002 forward. If you can show that there was no failure of performance that was not the result of obstruction by the City of Corpus Christi, you have the potential for prevailing. If you can't show that, if there are genuine problems caused by RTC prior -- or subsequent to October 2002 as alleged by Corpus Christi, there may very well be grounds for finding that the contract ought to be extended due to obstruction from Corpus Christi. But if you can't show that, then what happened prior to 2002 is not going to be very relevant.

Id. at 35-36.

It is clear from the context that the bankruptcy judge's statement that "there is no need for me to consider what might have happened before 2002" concerned the relevance of Corpus Christi's earlier actions and concerns regarding the construction issues with the wells at the landfill. There is no basis for appellants, based on their out-of-context reading of the bankruptcy judge's comments, to contend that they actually ...

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